Five Observations from Three Years in China

I've spent much of the last three years working on transportation finance and planning issues in China, and Reason Foundation now has transportation policy projects up and running in the cities of Chongqing, Xi'an, and Beijing. While my observations are far from definitive, I think our experience on the ground, mostly in Central China, has triggered a few thoughts and speculations on the future of the Chinese economy, its cities, and transportation planning that might be worth pondering on this side of the Really Big Pond.

1. The action is in the interior. Too often, western experts and press focus on the coasts. This is natural since that is the part of China that is most directly tied to western economies. Export industries are concentrated in Beijing, Shanghai, Fuzhou, Guangzhou, and Shenzhen. These coastal regions have been hard hit by the worldwide recession. But, China has a plethora of large urbanized areas (five million inhabitants or more) away from the coasts, and all are growing quickly. Among the cities to watch out for: Chongqing, Wuhan, Chengdu, Hefei, Suzhou, Kunming, and Xi'an. All are destined for populations of 5 million or more, and these (and other cities) will be ground zero for a second wave of mass urbanization. Demographers estimate that 270 million people may move to Chinese cities over the next 20 years alone, creating the largest urban population on the planet.
2. China's urban growth paths are strikingly familiar to its urbanized predecessors. Most of China's urban productivity is fueled, like European and U.S. growth in previous centuries, by rural to urban migration. Both Europe and the U.S. found their initial growth spurred by trade. Then, as populations grew, industrialization fueled growth in the interior as new goods and services focused on cultivating internal markets as workers earned more income and a middle class emerged. The search for a better, more prosperous life stimulates huge swells in "floating populations" that make officials statistics of permanent residents largely useless (as I found out while giving a presentation in one of our early trips). This urban growth in productivity and income not seen in relative terms since the Euorpean and American industrial revolutions.
3. The primary driver of Chinese new economic growth is domestic demand and spending, not international trade. While reliable estimates are hard to come by, let alone decipher, as much as half of China's growth before the world recession was domestic. My own guess suggests the domestic drivers accounted for much higher than half the nation's growth even during boom times. Indeed, even as China's export industries tanked in 2009, laying off millions of workers on the coasts (see "China Rising" in Reason's 2009 Annual Privatization Report on page 74), China's national economy grew at the astounding rate of 8.7 percent in 2009. The World Bank forecasts economic growth that could come close to 10 percent in 2010 (pre-recession levels). The vast majority of this growth was in the interior as businesses (foreign and domestic) invested to meet domestic Chinese demand from a burgeoning middle class. As the world comes out of the recession, China's domestic economy will continue to fuel national growth and provide a platform for effective international competition.
4. Megaproject investments seem to be driven by issues of benefit rather than cost. In a subtle and nuanced difference from the way many U.S. infrastructure projects move forward, the Chinese first look at the benefit the project might bring to the city or transportation network. Then, they look at its cost. As a result, megaprojects, whether it is an underground expressway (an interchange) network seamlessly connected to surface streets beneath Beijing or a massive investment in subways in megacities like Beijing, Shanghai, or Guangzhou, have better shots at getting built in China.  In places like the U.S., cost has become a primary, if not the most important, criteria for greenlighting projects. In part, this is a result of China being in the "sweet spot" of national economic growth: productivity growth is so rapid (it may be in its "take off" stage) that revenues and income generate substantial revenues that soften the importance of cost constraints for projects. Of course, a more streamlined, top-down government can also approve projects faster as long as they are in the plan and top leaders approve them. However, other nations with less authoritarian political systems experienced similar periods of rapid income and revenue (and waste) that enabled extraordinary investments infrastructure.
5. China can't escape the trials and tribulations of politics any more than western nations.  All is not roses in China, and many of their rose bushes have uncomfortably familiar thorns. No where do I see that more in the policy area of transportation finance. China's first limited access highways were built with real user fees (toll roads), using private equity through public private partnerships. The same model for road development was used for many high-volume arterials (Class II highways). Like the U.S., and unlike Europe and Australia which have figured much of this out already, China is grappling with developing the right framework for public private partnership and is bowing to political pressure from citizens that believe roads should be "free." The result? China is moving toward financing transportation projects via fuel taxes even as their long-term investments and strategies erode the ability of fuel taxes to generate the revenues necessary to maintain the road system. Déjà vu all over again?

Of course, all this can change. China is a fast moving place, and keeping track of all the balls in play is nearly impossible. Still, comparative research and analysis is always useful for broadening our own view of the world and thinking about policy differently. China is providing plenty of opportunity for that as they grapple with an unprecedented pace of urbanization.